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Corporate debt nears a record $10T, and borrowing binge poses new risks (washingtonpost.com)
190 points by pseudolus 6 days ago | hide | past | web | favorite | 182 comments

Both the article and the comments here are cringeworthy. I come to HN for the insightful comments, but for some reason, whenever finance is discussed, people do not look at data and start arguing about their feelings. This is a complex topic that requires careful analysis, unfortunately, the Washington Post has not spent the time to do this either.

I specifically want to point to this passage from the article:

"Last month, in its twice-yearly financial stability report, the Fed warned about the potential consequences of the market’s failure to police the rapid increase in risky corporate debt.

During the 2009 crisis, “BBB-rated” companies — the lowest rung of investment-grade — faced borrowing costs almost 7 percentage points higher than higher-quality companies. Today, the difference, or “spread,” is just 1.4 percentage points."

The way this is being framed is very dishonest reporting, 1.4% is close to normal, 7% is the highest it has ever been. A balanced discussion on the matter wouldn't get the same amount of clicks as fear mongering though.

Source: https://fred.stlouisfed.org/series/BAMLC0A4CBBB

If you think the financial system is evil or incompetent, please suggest a better way of doing things or go into the specifics about what is wrong. As an example, saying "React is evil and everyone who uses it is stupid" is instantly recognized around here as a nonconstructive comment. Rephrasing it as "I like Vue better for reason a, b and c" is much better. Yet when things are finance related, this standard is not upheld.

>the comments here are cringeworthy

This is true for anything engineering-related outside of computers. There is something about programmers being overconfident about their own knowledge of technical fields outside their own which is particularly painful.

Skip the comments if the article has anything to do with something that flies.

I once failed a job interview when I started talking about radios (licensed amateur, did some RF engineering at university) with a programmer who didn't believe me.

The solution is to make some broad generalizations about programmers?

That's what it is, a generalization, a first order approximation. I'm not saying everyone who has written a line of code is exactly like this or that, that's ridiculous and doesn't need to be pointed out explicitly.

It seems to be human nature. Bring up the proper way to educate children with almost any group and you will hear no end of inflammatory opinion.

>During the 2009 crisis, “BBB-rated” companies — the lowest rung of investment-grade — faced borrowing costs almost 7 percentage points higher than higher-quality companies. Today, the difference, or “spread,” is just 1.4 percentage points.

Besides, doesn't that imply that a high spread means we're in a crisis, so that the reasonable spread we have today is a good indicator?

Yes! It means performance expectations of BBB is quite stable. There is certainly the question over whether loose monetary policy is pushing investors to riskier assets and if these risks are therefore being underpriced, but comparing them to their recessions highs when everyone is fire selling them is completely disingenuous.

> It means performance expectations of BBB is quite stable.

Given that we are in a period of disruptive innovation I find that market optimism alarming. I think it means that even the least competent accumulations of capital are expected to extract savings by removing workers and hold onto their position using IP, regulatory capture, etc despite the best competition doing it all an order of magnitude better.

In a free market, the spread should be high right now since a few large players and startups should be about to decimate energy, transport, insurance and health costs and return the majority of the savings to customers. Why is there so much confidence in bad businesses holding onto profitability?

You can't say it's too high or too low without having an idea of the right answer to compare it with. What should the spread be? 1%? 10%? Is 1.4% appropriate, optimistic, or pessimistic?

I think at least 1/10 should fail with assets at least partially insufficient to cover. So going bellow 5-10% above government bonds says something very odd about the market.

(I think in past markets most companies in this class would have to sell stock since 20% will do very well and 10% fail so no one would accept the downside at a reasonable bond rate. The market is confused by the low underlying rate which IMO means the end of expansion to new markets, hence the disruptive only nature of the current market.)

A low spread allows increased junk borrowing, resulting in more pain when we do hit a crisis and the spread goes up.

When the fed bails out the corporate bond market, then that is when it becomes unacceptable. This happened recently. The Fed/Treasury had to do that during the 2008 crisis also.

Just never bail them out, and let them deal with their problems.

The comment below yours (in my view of HN) contains one of my core criticisms of our financial system:

> Modern loans don't work the way a classic model of lending would suggest. That has implications - loans represent a redistribution of real-world resources away from people who have worked for them and towards people who the banks like.

>loans represent a redistribution of real-world resources away from people who have worked for them and towards people who the banks like.

If these people have the resources, why do they need loans? And who is forcing them to do so?

Corporations take loans, issue bonds, take on debt and then use that capital to give corporate officers multi-million dollar payouts, golden parachutes and to buy back stock (which they hold) which makes the corporate officers and stockholders fabulously wealthy while the debt burden of the corporation grows. Eventually the debt burden grows higher and higher and becomes more and more of a drag on the company until the company goes bankrupt, employees laid off, pension funds insolvent and the remaining assets of the company are sold off in bankruptcy proceedings. But by then corporate officers who extracted millions and those who cashed out during the stock buy backs fueled by this debt walk away incredibly wealthy, free to repeat this same cycle of behavior at yet another company. And the Toys R Us worker (or worker at any of the thousands of other corporations where the same thing takes place) who made $35,000 a year finds himself out of a job and without the pension he thought he had coming.

Presumably the same reason startups take VC - to invest to create even more 'resources'.

In other words - desire and greed. There is no way to talk about financial systems without at least mentioning the psychology that drives money systems the way they are now.

The time value of money is a sort of aggregated greed, I suppose, and the time value of money is the motivator for finance. But the financial system is also shaped by regulation, and the psychology driving regulation in a democracy is more complex than a hunger for money. People have a sense of fairness and practicality. Why is FDIC depositor insurance capped, for example? Why are banks required to give special treatment to loans to deployed armed service members?

How much of corporate debt should have gone to households instead? At what rates?

This! People on hacker news have called 45 of the last 1 recessions! Having a finance background I can't stand finance related discussions on HN anymore. Any attempt at science immediately goes out the window and it just gets me so tilted. Too many armchair economist, not enough people willing to admit what they don't know and learn.

This isn't calling the recession; it's calling out the main area of rot in our economy that is likely to cause the most trouble / ripple effects whenever the next recession hits.

> Too many armchair economist

Isn't that the beauty of economy and meteorology? That everyone is an expert?

It amuses me when relatively new branches of study with poor to non-existent predictive modeling capability criticize "arm-chair" experts on accuracy/predictive aspects. Criticize methodology, data, or conclusions, not authority. This should be applied even in very well established domains.

The fact is, there really are no good predictive models yet. There are a lot of very good and legitimate reasons why there are no good predictive models dealing with complexity, scale, and an inherent connection to human behavior.

Now, this doesn't mean we throw our hands up and anything goes: we should still provide rationale and people should continue to study these systems methodically as they can. At this point, much of professional economics vs armchair economics isn't too far separated from chemistry:alchemy or astronomy:astrology hundreds of years ago. Obviously, there was great merit in the work early chemists, astronomers, etc. took on since we can now stand on their shoulders. Economics shouldn't be belittled, yet at the same time, it should be recognized for what it is: still not very predictive.

Not sure your fact is correct. I saw this linked on HN recently:

"We find that financial cycle measures have significant forecasting power both in and out of sample, even for a three-year horizon. Moreover, they outperform the term spread in nearly all specifications. These results are robust to different recession specifications."


The authors of that paper are not nearly as convinced in overall applicable recession predictability using their proxy measures as the abstract excerpt that lures the reader in:

"These results suggest that financial cycle proxies may be another indicator that could be useful to policymakers, professional forecasters and market participants more generally."

Emphasis added is mine. That's double the coverage of uncertainty propogation.

Unfortunately, I suspect, like most working in modern research and academic settings, papers have to inflate success as much as possible or the researchers lose future funding even though this type of work is high risk of failure. This is partly to blame for the reproducibility crisis we're encountering across the board.

I don't blame the authors (I feel their pain), but I do blame the poorly structured incentive/disincentive system creeping ever-further into academic research.

Yeah and even the 'experts' can't often see the cliff until they've fallen off it.

Even 'experts' aren't experts. In fact, it's a running joke in my city that the top senior meteorologist has made the exact wrong prediction every year for the last decade on winter weather. That's very hard to do. Flip a coin and guess the right (or wrong) side back to back nearly 10 times. Mind blowing. It is very good pay as a glorified fortune teller. It is too complex a problem right now.

Obviously the markets can’t go up forever without a correction, and overleveraging will happen and add up in the financial system. Negative interest rates are a sign of this insane stimulus.

The difference in the US this time around is that the public will have no say in bailouts of banks. It will be done all hush-hush with the world dollar reserves and demand for the greenback as the final backstop:


Not sure what the other federations would do though.

To many nay-sayers and short sighted in here.

I feel the same whenever the article relates to neuroscience...its just not the discipline of many in the HN crowd, but because everyone has a brain, people frequently think they have something insightful to contribute about how the brain works.

Contrast this with computer related ropics and the HN expertise shines.

Not my field, but perhaps fear of embarrassment is important? Feynman's snark that (something vaguely like) good cocktail party topics are those where no one present has expertise.

I've seen a biology professor, writing a biology children's picture book, with unusual care, who seemed in part motivated by not being seen by their peers as having gotten it wrong.

I've recently seen comments that since it's HN, voluminous uninformed conversation is fine, and without harm.

So absent ego threat, or clear social norms, the next line of defense for quality is... comment votes? Which seems more a mechanism for norm enforcement than creation.

The HN comment guidelines don't actually recommend "thoughtful and substantive", only that that should increase as topics get divisive. The emphasis seems respectful and curious discussion. That combination might tend towards quality, but perhaps has failure modes. Like concentrations of poorly informed discussion, perhaps less than ideally respectful and curious, either discouraging quality, or taking too long to shift towards it?

One argument for discussion fora supporting personalized filtering, is the speculation that virtual subpopulations might create and sustain norms more easily than an unfiltered population can filter comments.

Brainstorming, perhaps highly upvoted comments might be darkened or otherwise highlighted, analogous to how the downvoted are lightened? Upvotes moving a comment upward, within its parent's node, is a quality signal that is weakened when there are few siblings. So outside of root and big nodes, it's hard to scan/skim for high-quality outliers. Which incentivizes making bulk judgments about whether chunks of the hierarchy, or even entire article discussions, are of a quality to be worth reading. And reduces the incentive for creating quality outliers in parts of the hierarchy where they will remain low visibility.

Interesting comments, sorry I never responded. It is certainly a difficult problem!

No worries. Thanks for the follow up.


One of my pet peeves is talking about debt without corresponding asset levels. Corporate America has a net worth of ~$35 trillion.

Real or intangible assets?

The media is like this about almost any field you know about. Pharmaceuticals for example.

>Having a finance background I can't stand finance related discussions on HN anymore. Any attempt at science immediately goes out the window and it just gets me so tilted. Too many armchair economist, not enough people willing to admit what they don't know and learn.

I would wager that finance is not the only topic subject this effect. E.g. Everyone in every Tesla thread is an expert in every component that goes into an automobile.

And I say no. It's called social economics. The social aspecr is forgotten all to often. You can model markets to whatever complex formula you want and predict market behavior to your harts content. In the end it's people making decisions. And people at times do not behave according to mathematical models.

Hence the entire field of behavioral finance.

According to your own source that rapid increase in borrowing cost happened in a very short amount of time coinciding with the period things began to go to shit. Prior to that, when most of the bad stuff leading up the crisis was happening, it retained a fairly normal level.

Relatively "normal" cost of borrowing is one thing, but over-leveraging is another. Especially when there isn't a whole lot of room for the cost of borrowing to go down. Feds move to make.

To be clear, my source is showing the spread, not the absolute cost to borrow.

I didn't say we are over, under or properly levered. If you are implying we are over-levered, go ahead, just provide some evidence. The evidence Washington Post provided is meaningless under closer examination.

Although I think we are in agreement that a normal spread does not imply future stability.

Yes - I understand the chart. But maybe I'm missing something - you've said the article is lacking substance but haven't really substantiated that yourself? The only statistic pointed out is one you initially mentioned. If you have more data (I saw a neat SA link below), I'd like to take a look myself.

The author in two consecutive paragraphs states that a number of government and private orgs are sounding alarms, and then proceeds to say the danger isn't immediate. He echoes this sentiment throughout.

I think the over-leveraging has to be considered on a case by case basis, as it's hard to make that assertion across the board, especially given how much of a borrowers market its been for years.

The article to me reads as a warning that this is unprecedented so we should probably be careful, but only time will tell.

>Prior to that, when most of the bad stuff leading up the crisis was happening, it retained a fairly normal level.

People aren't good at predicting the future.

But the beauty of the free market is, if at any point you feel like things are going "to shit", you can position yourself accordingly.

Right - I guess my point is why harp on one statistic as if that is supposed to make us feel good about what's going, when the reality is we don't know and the article is more of a "heads up". I think the article tries to head off most of the doom and gloom early on saying:

The danger isn’t immediate. But some regulators and investors say the borrowing has gone on too long and could send financial markets plunging when the next recession hits, dealing the real economy a blow at a time when it already would be wobbling.

Shorting bonds is actually not so easy for a retail investor.

Companies are borrowing because rates are low and Treasury curves are flat. Why not borrow? It's much better to lock in long-term financing now so if/when liquidity dries up you aren't forced to roll over short-dated debt.

Yes the article touches on this. But goes on to also say that this could be really bad in a crisis or this could be no so bad in a crisis depending on who you talk to and why.

If you think the financial system is evil or incompetent, please suggest a better way of doing things or go into the specifics about what is wrong.

Ok, I'll give it a shot, but bare with me as I am just a developer and don't really know much about economics.

As I understand it, new money is created by banks loaning out more money than they have, which is called leverage. They do this by borrowing against the federal reserve, and the bank makes their money by charging their borrower a higher interest rate than the bank has to pay to the federal reserve. The banks assume the risk of a borrower not paying them back, and therefore get to be picky about who they lend money to.

If I am correct in how the system works, I see two specific problems.

1. Banks are the only ones who get to decide who benefits from the creation of new money

2. Business's and individuals who are chosen to receive loans are now under pressure to not only pay it back, but also pay the interest, as well as taxes on whatever income they make to pay their debt.

If we agree that the ability to create new money is necessary for a growing population, then the question is if this is the most efficient and fair way to go about it.

I think a better answer is something close to basic income, but not quite. Instead of allowing banks to choose how much new money is created, and who benefits from it, I think there should be a governing body that decides how much new money needs to be introduced every year. Then that money gets evenly distributed to every citizen.

Under this system businesses would not be able to grow as fast, unless they have private investors, or provide something people actually want to pay for. However the influx of money should create more investors, and make people more willing to spend money. The biggest problem I can think of with this approach is deciding how much money should be created.

>Banks are the only ones who get to decide who benefits from the creation of new money

How about we use the term "financial system" rather than banks. And in that sense, how is that different than:

"a governing body that decides how much new money needs to be introduced every year.

Except that it's mostly private (though heavily regulated), dynamic and market driven. You trust the legislators to figure out how much money is needed annually? Yikes.

Also, I'm not sure why you focus on "new money". Money is fungible and the world is awash in it. We have negative rates through most of Europe, for crying out loud! "New money" goes to where it is demanded.

You answer that for the US where the fed system is indeed is indeed mostly private. Not so in most parts of the rest of the civilized world.

It is a commonly believed myth that the Fed is mostly private. The people in charge of monetary policy are appointed by government.

>Not so in most parts of the rest of the civilized world.

We must live in totally different places if you'd prefer monetary policy be established by politicians. I'll take the academics, for better or worse.

If the bank creates "new money" and lends it to a business who pays it back with interest, isn't it in fact the business who has "created" the money? From this perspective, the banks are really just making bets on who they think can create value.

In reality I don't think new money benefits anyone in particular. If anything, inflation is detrimental to money holders. As alluded to in a sibling comment, this new money is distributed holistically and is for the benefit of the system itself (or a byproduct of the system, if you prefer).

Question is... are banks the best intermediary for determining who is capable of creating value? Perhaps in traditional established commercial lending, but would challenge its efficiency on newer orgs.

One benefit of basic income would be that consumption is about as close to market driven as it gets. So naturally the money would flow to companies providing value to individuals based on their needs.

I don't see the relation to basic income. You could just say income and be correct.

I'm not sure how free money makes consumers a better judge of value, when the did nothing of value to get the free money.

In fact, behavioral finance studies have show that people use "mental accounting" and free money is seen as having little value.

> The banks assume the risk of a borrower not paying them back, and therefore get to be picky about who they lend money to.

This used to be the case but is not so common anymore today. A lot of debt issued by corporations or households (mostly mortgages) nowadays is securitized and sold directly to investors. The bank doesn't have the risk on their books and gets paid for their service (creating packages of debt with attractive risk / return ratios) but doesn't receive interest payments.

> I think a better answer is something close to basic income, but not quite. Instead of allowing banks to choose how much new money is created, and who benefits from it, I think there should be a governing body that decides how much new money needs to be introduced every year.

How would a governing body decide who can get a credit? A big part of banking is creating customer relationships and learning more about their companies, cash flows, growth opportunities or challenges. Because banks already have a good overview over a company's finances they are probably in the best position to estimate who would benefit from a loan and be able to pay it back.

How would a governing body decide who can get a credit? A big part of banking is creating customer relationships and learning more about their companies, cash flows, growth opportunities or challenges. Because banks already have a good overview over a company's finances they are probably in the best position to estimate who would benefit and pay back from a loan.

The governing body would only decide how much is created not who it goes to. Every citizen would get an equal share of all newly created money. Banks would still be able to lend money as they see fit, but they would not be allowed to use leverage.

I have a store. People buy food from my store and I use that money to buy food from farmers. Ever since everybody started receiving an equal share of any new money created, farmers have been less interested in selling food to me. After all, they already have plenty of money.

That's great. I also have plenty of money, and there are plenty of wealthy, starving people who would like to give me money. But I just haven't been able to figure out what I could possibly offer the farmers to get them to go out into their fields and do farming. They say they "need" fertilizer. What the heck do I know about fertilizer? If there were something of universal value that I could give to the farmers, they could use it to go buy fertilizer. We used to have something for that. It was called money.

Ah, I see you are talking about helicopter money with leverage restrictions for banks. The money distribution part is being discussed as a potential successor to QE. I don't think restricting leverage for banks is in anyone's interest - assuming banks adhere to their capital requirements, don't take up unsustainable amounts of risk and need a bailout. Fractional reserve banking allows banks to offer their services for free and pay you for your money on their savings accounts. If you take that away you will simply have to pay for keeping an account or do your own research on how to invest the money, which will probably cause you more work and a worse risk / return ratio. Or take banks entirely out of the equation and allow everyone to simply keep their money at the central bank.

I've been considering this very concept as well, and while don't claim to understand all of the ramifications behind it, I would love to hear experts discuss SWOT.

My mental model always breaks down when considering international impacts to such a strategy. Currency, trade, and capital investment shifts.

I enjoy the topic of debt but the more time I spend staring at it the more frustrating the framing around it seems.

Modern loans don't work the way a classic model of lending would suggest. That has implications - loans represent a redistribution of real-world resources away from people who have worked for them and towards people who the banks like.

This is a very concerning dynamic given that the 2007-2008 era financial crisis revealed that the bankers are incompetent at assessing risk. They should not be the ones choosing who gets a home or who gets to succeed in business. There is an ongoing trend where people in credit exposed markets (housing, other assets) are raking in unreasonable returns at a lower-than-advertised risk as more and more easy credit is created. It isn't fair or clever.

> the 2007-2008 era financial crisis revealed that the bankers are incompetent at assessing risk

I think we need the inverse of Hanlon's razor[0] to be a thing. "Never attribute to stupidity that which can be adequately explained by systemic incentives promoting malice." A Hanlon's handgun, if you like.

What I remember from reading about the 2008 financial crisis isn't that bankers were incompetent. It's that various parties started packaging up financial instruments to make them look like less risky instruments, so that they could be sold to suckers. Then they insured themselves against those instruments blowing up. This suggests they knew well what they were doing.

In fact, banks aren't in the business of assessing risk. They're in the business of making money, which they often do through assessing risk. The important point is that assessing risk (or giving loans, or mortgages, etc.) isn't their raison d'etre, but a way to make money they've specialized in. If there's a way to make easy money by doing something else entirely, or by compromising their core competence, there are strong economic incentives to do that.

This applies to all other companies doing anything else as well. There's few organizations that consider doing things they do well as a terminal value; usually, it's only instrumental in getting money. That's something IMO we have to keep in mind if we're trying to make accurate predictions of future behavior of a company.


[0] - https://en.wikipedia.org/wiki/Hanlon%27s_razor

The loan packaging and insurance was a symptom of the underlying problem that drove the 2008 crisis: transatlantic transactions that worked to evade regulations to control systematic risk.

This process started, if you had to pick a place, with a US bank issuing a mortgage. The cash part eventually wound its way to various short-term "risk-free" assets, one of which being short-term asset-backed loans to European financial institutions. The mortgage asset got packaged up and sold on to the broader capital markets, of which European financial institutions participated. So, the US banking system basically created a market in which European financial institutions could buy mortgage-backed paper, financing the purchase at good short-term rates generated by the cash created by issuing the backing mortgages.

Of course, banking regulators know that just letting banks go hog-wild creating asset-liability pairs is going to end up badly, so this is where the regulatory arbitrage comes in. Under US banking regulations, banks had limits to the assets on their books. There's a strong incentive to offload them into the capital markets - the banks realize an immediate profit, and clear out valuable space on their balance sheet. European banks, on the other hand, had a more complex leverage limits that took into account the perceived riskiness of various assets that they owned, with AAA-rated assets giving the highest leverage limits.

So that, in a nutshell, is what happened in the run-up to 2008. Banks generate more profits when they create more risk, so there's regulatory limits on risks. US banks evaded those risk limits by selling the risk on to the capital markets, and US regulators assumed that this process was systematically safe. EU banks evaded those risk limits by blindly levering up to buy whatever AAA-rated dollar-denominated assets the US capital markets handed to them, and EU regulators assumed that high leverage on AAA-rated assets was systematically safe. Neither regulatory regime had a good holistic view of the financial asset vortex brewing in the Atlantic.

Anyhow, my overall point is "so that they could be sold to suckers" doesn't really tell the entire story. The asset packaging was done in order to take as much risk as possible under US and EU banking regulations, taking advantage of transatlantic differences in regulatory regimes.

Thanks for a much more detailed account of the crisis. Yes, I simplified in my post, but your more complex story still doesn't read to me as "people were being incompetent"; I see in it a tale of a complex system getting exploited in several different places at the same time, and shaking itself apart in the process.

Entirely tangential: the first time I saw your handle here several years ago, I initially misread it as "trust vectoring" (don't know why, I knew of the term "thrust vectoring" before). Ever since, this phrase stuck with me, and I feel it applies to the 2008 crisis.

I think that still is more or less a polite way of saying that American banks found suckers in Düsseldorf and Frankfurt to sell to. Sometimes in multiple steps: First sell to Deutsche Bank, they sell to suckers in Düsseldorf.

There was also plenty of domestic mortgage over-expansion; Anglo-Irish blew up by lending to far too many speculative property projects. The book on this is excellent.

I remember talking to people involved in those kind of projects at the time and even they noted that Anglo-Irish never seemed to turn down an opportunity to lend money.

Would you happen to know the name of the book?

Don't forget the part where the ratings agencies systematically failed to accurately assess the riskiness of the MBSs because they didn't want to piss off their customers (the banks / their mortgage issuance wings).

Temporal's razor: "Never attribute to stupidity that which can be adequately explained by systemic incentives promoting malice."

All financial crises have a common trait: A few smart people exploiting the market.

The smart people in the 2008 crisis were those who had been bundling CDOs to hide the bad debt in the decades before, as well as those who insured themselves against the blowup _knowing that it would blow up_.

They _depended_ upon the majority of financial institutions believing the lie that the property market would never crash.

That's the stupidity in Hanlon's Razor for the 2008 crisis, exploited by the few smart ones.

I was just a few of years out of school,I think it was 2006. Walked into a local bank branch to get some stuff sorted out.The women tried to sell me some private pension scheme,which was popular at the time.I asked her what would happen if the bank would fail,to which she responded with uncontrollable laughter and finally managed to say: banks don't fail. Well,I thought, I'm sure as hell I won't be buying products from this bank..We all know what happened 2 years later.

While this person obviously didn't empathize with your concerns, it should be mentioned that bank tellers are often under pressure from higher ups to sell products to walk-in customers, regardless of whether they need them or not. And the easiest way to sell is to basically tell the customers that their concerns aren't valid.

The most egregious example of this is the Wells Fargo scandal, where new accounts were created for customers without their knowledge [1]. Similar complaints can be found with pretty much all major banks. It's a natural consequence of a culture where employees are ordered to upsell customers on lines of credit, new credit cards, and other financial products.


>We all know what happened 2 years later.

The savings and loan fiasco of the late 80s saw over 1000 banks fail in 10 years.

"blowup" is a noun and "blow up" is a verb. Your sentence should read:

>as well as those who insured themselves against the blowup _knowing that it would blow up_


>It's that various parties started packaging up financial instruments to make them look like less risky instruments, so that they could be sold to suckers.

This was enabled by fraud. At the root of it were the people fraudulently stating borrowers had incomes higher than they really were.

I would say that was a symptom rather than a cause - once people stopped caring about the quality of mortgages (because they would be sold off and packaged up and sold on) it was pretty much inevitable that this would happen.

They can’t be sold off if they never passed the underwriting tests in the first place. Intentionally not verifying incomes and/or fraudulently staying higher incomes is what allowed for plausible deniability to rate them higher than they should have been.

They weren’t called NINJA loans for nothing; No Job No Income no Assets. I don’t think they were lying about anything.

>What I remember from reading about the 2008 financial crisis isn't that bankers were incompetent. It's that various parties started packaging up financial instruments to make them look like less risky instruments, so that they could be sold to suckers.

First of all, I disagree: I think risk mispricing ("House prices can't fall across the country"), or incompetence, was the big problem.

But suckers get suckered every day. If big money-runners can't be bothered to understand what they are buying, I don't feel sorry for them.

>Then they insured themselves against those instruments blowing up.

This is standard financial practice. Why would they hold a huge, one-sided bet on the housing market on their books?

Didn't AIG end up on the wrong end of a vast quantity of that "insurance" - which turned out well (it certainly turned out splendidly well for the AIG employees selling the stuff).

Incompetence played a large role. I knew a couple of people who were interning at investment banks at the start of the financial crisis. The banks had absolutely no idea who owned each piece of the synthetic instruments - including the underlying collateral - that were on their books. Keep in mind that the insurance wasn't there to protect themselves - it was there to ensure that the product would receive an AAA credit rating - which made it palpitate to institutional investors who were restricted from purchasing or otherwise stayed away from riskier assets. It turns out that you can't accurately insure (or price) instruments when you don't have some knowledge of the thing that secures the instrument.

Seems to me if the banks piled up a bunch of junk, didn't track who owned what, took advantage of the lack of bad information to make crap insurance look just good enough to fool the ratings agencies, and sold the resulting AAA-rated instruments for AAA prices, then the banks did a perfectly competent job making money for themselves.

The ratings agencies did a bad job, but that doesn't mean they weren't able to do better. They make more money doing a bad job so that's what they did.

The real incompetents were the investors, but the whole system was telling them they didn't need to be competent, that's what the ratings agencies were for.

Yes, but what happened to the individuals involved? A lot of them went home with giant bonuses.

The real incompetents are the developers of the system. It's clearly optimised to create the illusion of useful business activity out of bad-faith value manipulation and outright market fraud.

Of course they're not considered incompetent if they personally do well out of it. So perhaps the real problem is more systemic.

The behaviour of ratings agencies is very well depicted in 'Big Short', which essentially says that if one company won't do it, other will always agree to issue AAA rates.

The underlying individual assets didn't really turn out to be poorly rated. The problem was they assumed a low-level of correlation between the risk of individual assets. Basically, they believed default risk for a house in Milwaukee essentially an independent variable compared to default risk in South Carolina. They made that assumption because there had never been a nationwide (or global really) housing crash.

That assumption actually drove nationwide demand for mortgages, which lowered rates, thereby creating the correlation they assumed didn't exist.

Corporate debt is a very different animal from consumer debt. In the current environment of very low rates, it is often cheaper/prudent for a corporation to take on debt rather than use its cash. See Apple, who has ~100B in corporate debt outstanding. For them it was cheaper to pay dividends and do share buybacks using debt than to take a hit repatriating cash at that time.

Corporate debt is so cheap now, that it is also often better to issue more bonds than to do any public offering. Giving away ownership is probably the most expensive form of financing long term.

Finally, as a percentage of GDP 10T just isn't very interesting. It's akin to the 500 point market swing headlines, and uses large numbers to make it sound more exciting.

This comment gets it. I think it's disingenuous and borderline immoral to use a big number to drum up sensationalist panic without explaining how it even behaves or contextualizing what it exists inside of. People are reflexively going to complain about how it seems like 2008 all over again even though the beast is, as you say, entirely different.

10T is a huge number, but that's not the issue -- the issue is that as a percentage of GDB that's also at an all times high value.

It is like 2008 in the sense that a bubble popping (corporate debt this time) is forcing the FED to bailout irresponsible corporations yet again (see the recent balance sheet increase).

>the issue is that as a percentage of GDB that's also at an all times high value.

When you have historically low rates for a historically long time, it makes sense that debt would reach historically high levels, because it's cheap.

That's just a bit like saying when drug prices are so low it's ok to have a lot of overdoses, because, hey, people are taking advantage of those low drug prices.

If we entered a new era where such low interest rates are necessary for the "econony", great let's all accept this new fact.

However the interest rates were cut in 2008 so that elites could be bailed out, lest they default and drag everybody else and they were supposed to be brought back where they used to be; the central banks balance sheets were supposed to be brought back to where they were historically -- none of this has happened.

Nah, the interest rates being so low serve mostly the elites while propping up massive bubbles in financial markets, real-estate and big corporations too big to fail. The central banks/states get to pick who is saved, involve themselves more and more in the economy and replace what should be regular market mechanisms and create huge systemic problems.

What's so wrong with savers receiving decent yields for their bank deposits? Why should everybody all of a sudden use their savings to buy houses that they let? Just so they can fuel the vicious bubble cycle of the de jour investment vehicle the elites have picked? Why should central banks exchange money printed out of thin air with negative interest rates for ill performing bonds, locking in the profits of bond-holders?

The only answer is "because otherwise it will lead to cascading series of defaults that will bring down the economy" -- then the problem is the financialization of the economy and no actionable way of removing the bad apples from the basket, in which case we're allready in for a catastrophic failure of the current financial system when all the apples will go bad.

Where was corporate debt, as percentage of GDP 10 years ago?

Has that ratio changed in the recent past?

nevermind -- I looked it up and it's at all time high.

Yes, an all time high of ~47% which is ~1% over the last all time high. Not as big of a doomsday headline though. It also doesn't take into account that corporate profits are also at highs.

I'm not saying that continuing to increase corporate debt is necessarily good. But, the fear mongering of 10T alone without looking at the whole picture is disingenuous. A much better article with more of the picture is here.


Rates have been very low for a very long time, you would expect to all time high debt with current interest rates. It would be more concerning if people were not taking advantage of the essentially free money.

I'd be concerned if the idiots taking decisions and crashing the financial system when interest rates were at 5% were not severly punished and let loose when interest rates were at 0%, almost like an arsonist being put in charge of a gas station. Oh wait, they weren't....

This is just like consumer debt. It's better to get a 3% mortgage and put all your cash in the stock market then to payoff your house. Not only do you get a higher return, but you save on taxes.

I think the difference is in the types. Mortgage debt can make sense assuming you're borrowing within your means to pay, but consumer debt also includes credit cards, auto loans, personal loans, and student loans that often have questionable financial logic behind them.

Exactly its only if you have an expensive debenture xxx Mill at 8.5% for example

This should be top comment.

> loans represent a redistribution of real-world resources away from people who have worked for them and towards people who the banks like.

This is simple, appealing, and extremely misleading; loans are more a temporal redistribution of resources. You get something that you will have worked for before you do the work, but that doesn't really absolve you from getting the income to pay the loan back.

> They should not be the ones choosing who gets a home or who gets to succeed in business

Who should?

> There is an ongoing trend where people in credit exposed markets (housing, other assets) are raking in unreasonable returns at a lower-than-advertised risk as more and more easy credit is created.

It's not that the risk is lower, but it has become horribly correlated. All the homeowners win or lose together. Globalisation of the housing market as a "safe asset" makes the problem worse. Perhaps we need a crackdown on owner-non-occupiers like the Vancouver foreign purchasor tax.

To add on "who should decide who gets money" ... Let's not forget the equity capital markets and private lending institutions.

Banks don't have a strangle hold on providing capital.

Actually they do; banks can create new money. It is practically impossible to compete with an institution that can create new money when providing capital. It is called Fractional Reserve Banking and only licensed institutions can do it as far as I recall.

I'm not intimately familiar with US markets, being Australian, but the M2 suggests that half the money currently in existence was created since 2007. If whoever is creating that money doesn't have a stranglehold on providing capital they are going to, at a minimum, have massive influence. It is worth focusing in on, it may only be half the money in the system but that is actually a big deal.

I think you're talking about the ability of the federal reserve to print money and buy US treasures, thus increasing the money supply.

The thing is, US currency is global commodity and as such is subject to supply and demand forces. The Fed targets a 2% inflation rate, which strikes a nice balance.

If the currency appreciates, people will hord it and a currency bubble will cause major economic problems.

Just look at bit coin. It currently worth $20,000, no wait $10,000, no wait $17,000, no wait...

Now try to base a functioning economy on a commodity that has wild swings. It can't be done well.

To the extent this is true, anyone can create new money by extending credit - such as when issuing an invoice with delayed payment terms. There's a not-inconsiderable amount of money floating about in trade credit.

> Who should?

I dunno. Not politicians, not the people who were in the system around the last financial crisis and not their proteges. A local Plumber's Union for all I care, although I'm sure a market could find better alternatives if it were left alone to function. I suppose my assumption is that we should try a new community of people every time the current community causes a trillion dollars in damage. If my plumber caused a trillion dollars in damages I would consider going with a different plumber next time. The current crop of managers who get to decide what the financial system does are the only community of people (apart from politicians, maybe) where there is noncontroversial proof that they are likely to cause a trillion dollars of losses through poor decision making and bad models. When companies muck up that badly people should lose money, not get to drink from a money hose as in '08.

From Wikipedia [0]: September 29, 2008: The House of Representatives rejected the Emergency Economic Stabilization Act of 2008 instituting the $700 billion Troubled Asset Relief Program. In response the Dow Jones dropped 777.68 points, its largest single-day decline.

^ That sort of thing is beyond stupid. That inhibits the capitalist system from properly bankrupting owners and purging incompetent managers. A 700 point market rises for the owners because taxpayers will fix things and all the managers will eventually get a bonus from having a positive impact on stock prices. This is the opposite of free market capitalism, and the fact that it happened over a short timeframe doesn't change its importance to the long term incentive structure of the system.

[0] https://en.wikipedia.org/wiki/Financial_crisis_of_2007%E2%80...

The article is about corporate debt. Banks don't 'choose', investors do.

I'm going to draw an analogy with mortgages. Superficially someone who wants to own a home has the option of taking out a mortgage or not. However the 'no debt' option means you must find a home in a market where nobody else has access to a lender. The choices in any competitive market are basically to take on debt or bow out and rent. In a competitive market, the person who lends the money tips the scales and decides who gets resources - in this case a house.

So back to corporate debt; yes on the one hand investors choose to take on the debt. On the other hand, if they aren't willing to take on debt then the rational choice is more to bow out of the market than to put in long hours and compete. The alternative to debt is competitors that simply have more resources without having to work particularly hard for them. Much like taxi companies v. Uber - how do you compete with a company that from a profit perspective pays passengers to ride with them? Why do you compete? The short term answers to those questions are challenging. Only people who are willing to take on excessive debt for some other reason will be left after a few years. Or companies with a tolerance for pain.

I wouldn't have a problem with this dynamic except for the fact that the banks clearly have government backing and are only surviving because of it - if investors had control and had to bear the consequences of the bankers action there would have been profound changes after the last financial crisis instead of Quantitative Easing and a return to business as usual. There is substantial evidence that the people who control the money are very bad at what they do. They should be replaced with people who are, at a minimum, are an unknown quantity rather than legitimately incompetent.

I know technically all this debt is probably being purchased by retirement funds. But the major contributing reason the retirement funds are willing to buy such low quality trash is because the banks (and central banks) have been pumping money into the system to compete for anything that could possibly return a yield. Competition is usually a good thing, but competition by people who can literally print money is not helpful.

> I know technically all this debt is probably being purchased by retirement funds

Actually, a material chunk of that debt is held by big tech.


It's not a material amount vs overall outstanding market and a majority of the holdings are in higher quality, short-dated bonds that will likely be paid at maturity long before any credit stress is seen. Corporate treasurers are not in the risk taking business. They are squeezing out incremental yield from cash on hand.

The people that control the money is not bad what at what they do. It’s just that the incentives are wrong when the system is rigged so that either they win, or we lose.

> However the 'no debt' option means you must find a home in a market where nobody else has access to a lender.

Or you can have a lot more money to start with than the average home buyer; you only need equal access to financing if you also have equal access to cash.

> However the 'no debt' option means you must find a home in a market where nobody else has access to a lender.

As someone who bought several houses without debt, I really don't understand what you are trying to say here. Please explain...

No kidding. Pretty much anyone selling a property will pick a cash offer over a financed one, if nothing else to eliminate a long wait period for underwriting.

I think he means that given 2 people with the same amount of wealth, the one that borrows money can either buy a nicer house than you, or outbid you if you want the same house.

They assessed risk then sold their mortgages to third parties. How accurate do you figure their assessments were if they knew they wouldn’t hold that debt? Then the financial instruments created from that debt were valued by models trained on RE prices that grew for something like 8 years then tanked. So those same instruments grew then tanked. Nobody called them out on it because they hid the functioning behind models no one could really understand at the Fed.

> 2007-2008 era financial crisis revealed that the bankers are incompetent at assessing risk.

They are not incompetent at assessing risk. That is entirely their job.

It was that the government intervened in the housing market and to do so, assumed risk from the 1993 Clinton initiative to offer minorities access to mortgages and purchase their own homes.

Mozilo from Countrywide exploited this.

Then how do you explain that at that time in Europe asset based finance (for things like car leases, trucks, boats etc.) changed from fairly rigid due diligence on the borrower to almost auto granting the loans?

Rather than this 10 trillion number I’d prefer to see how much corporate debt has some level of default risk. Presumably some fraction of this is issued by solid companies with Enough cash reserves or future Income to cover the debt.

I see the above comment downvoted, but it seems correct to me. For example, Assicurazioni Generali[0], just emitted a new 10y bond for €1B.

That would increase the total corporate debt of the world, but Generali has a higher credit rating than most governments, so why is that significant?

[0] https://en.wikipedia.org/wiki/Assicurazioni_Generali

It’s not significant because $1 billion is 0.01% of the total. Also, this article is about US corporate debt specifically.

What is significant is this quote: “sending total U.S. corporate debt to nearly $10 trillion, or a record 47 percent of the overall economy.”

A slightly more detailed article on the topic: https://seekingalpha.com/article/4254042-corporate-debt-cris...

Chart from the article shows debt growing by 3.5% since turn of the century. Considering rates going to near zero if anything that is a low growth rate.

Sorry, but coming off the summers doomsday hype this reads like a mole hill.

Looking at absolute levels of debt is useless clickbait, one should look at trends in debt / ebitda.

I wonder how much of the rise in percent of debt that was poor quality was fueled by investors seeking higher bond yields in a low yield environment...

EBITDA is cyclical though. Debt / revenues would be a better measure.

Revenue is cyclical too, I’d look at headroom for downturns in debt/ebitda especially where firms start to slip into junk bond territory.

You mean the chart that goes from 4.5% to 9.95% ?

That's the debt doubling in 20 years isn't it?

The small bump in the middle is the economical crisis, you see how debts were not paid ?

You appear to be misreading the chart, it is 4.5T to 9.95T. "T for trillion dollars" not "t for percentage".

Considering 20 years of inflation yes, a doubling in twenty years of a nominal cash record is trivial. GDP in real terms (inflation adjusted) doubled in the same timeframe.

In other words: debt as percentage of GDP has done down.

Also of note you claim "you see how debts were not paid" pointing to a point in the graph where debts _were being paid_, that is why the curve does down. When debts are repaid faster than issued then total debt reclines.

To recap: everything you wrote was either factually wrong or a mis-understanding how to read a single variable graph. Please put more thought when attempting to nerd-snipe.

There is no doomsday debt bubble, not based on these numbers.

I might have, but nevertheless I was reacting to

Chart from the article shows debt growing by 3.5% since turn of the century.

You appear to be misreading the chart, it is 4.5T to 9.95T

How did you conclude that it grew 3.5% when it's now doubled ?

Simple, 3.5% yearly for 20 years is near double. Also note how "growing" in English is a present tense verb. In English this implies a continuous motion.

Were you trying the classic "pretend to mis-read then express outrage at your own misunderstanding" brand of nerd-sniping?

Please try to be nicer. As per the guidelines:

> Be kind. Don't be snarky. Comments should get more thoughtful and substantive, not less, as a topic gets more divisive. Have curious conversation; don't cross-examine.


> Please respond to the strongest plausible interpretation of what someone says, not a weaker one that's easier to criticize. Assume good faith.

You are right I am sorry. My replies have been in annoyance. Several times these past few months my posts have been replied with low-effort "gotchas" and I am a bit low on low on patience for the nerd-sniping.

Let me apologize for my comments, I should have paid more attention to both the article and your comment.

Now I see that we basically agree about the numbers, we just have a different opinion on the fact.

They were not made in ill will, I was just trying to make a discussion. I agree that I could have toned it down on the loaded questions, I was a bit undercaffeinated this morning.

I happily accept your apology. Thank you for trying to open a discussion with me, I live talking about economics and finance.

Let's start fresh and get to that discussion we both want. No problem of course if you disagree with me.

To open the discussion my opinion is that this article is overstating the case for concern in corporate debt. The growth since 2000 is not significantly above a trend line which one might expect in a loow interest rate environment.

For my part I did sell most of my stocks in the past few months and moved my families money into a form of real estate like real asset. I do think the markets are bubbly but journalists have been trying to pin a possible catalyst for a popping of said bubble.

Corporate debt I argue would not be that cause. In fact one of the common complaints of the clo market is how junk bond issuing companies are able to reduce the number of covinents. This is both a testament to the strength of demand, but would also make it harder for the market to price correct, aka pop.

I will offer up that the most likely cause of any popping would logically be China. Yet of course China's strong capital controls allow them great freedom in issuing stimulus without tanking trade balance.

What would you like to discuss?

Let me start off by saying that I'm not an expert in finance, but I'm sure you've already noticed that.

The corner I'm coming from is the debt doubling. I know you mentioned GDP doubling as well, but I would be more surprised if the GDP hadn't double with growing debt.

What seems alarming to me is the constant pace at which the debt is growing with no attempts to reverse it at all.

What is your take on my humble observation ? Do you think that the debt not even touching the 5T mark after the 2009 crisis is healthy ?

So there 3 major categories of debt when talking about a nation:

1. Household 2. Corporate 3. Government

Each country has a slightly different mix between these 3. Keynesian economics (which is pretty old stuff) explains why all these 3 tend to sum to a number similar between nations.

In other words, if one country has a lot of government debt there is a tendency for said country to have less household and corporate debt. This is the case in Japan where the government debt is at over 200% of GDP, but household and corporate debt is super low.

In the great recession in America household debt declined a good bit. Corporate debt declined a little. And government debt went up a lot.

With interest rates so low, near 0% or lower in inflation adjusted terms, holding debt is a "good thing" provided said debt is funding profitable investments. Thus you do not want households growing their debt, since they spend the money. Nor do you want government debt to increase except as a stimulus. Meanwhile corporate debt represents businesses making capital funding decisions.

What has happened with ultra low rates is business are financing themselves by borrowing instead of issuing equity.

Share buy backs are a big news, but more risky is leveraged buyouts. In either case it is hard to see how these borrowings are "wise investments". To the extent increased corporate borrowing is going to buybacks or LBOs, maybe those are mis-investments. I might call them simple "capital chasing rent seeking", which also occurs when real estate prices go up.

Altogether corporate debt is the nicest form of debt you'll find in an economic mix. China is mostly government debt, with rising household debt and under performing corporate debt. If America's corporate debt is going to offset equity issuing while the balance books remain solid, that is different beast versus China's situation.

Which leads me to the more interesting topic: the reduction in the natural rate of return on capital. GDP growth is driven by techonolical progress. Yet our recent tech progress has been in non-capital intensive indsutries. Software does not truly require lots of money. In the past, for example railroads, a good business plan was less about "can this work" than "This is how we shall bridge the risks building out this clearly attractive business".

Steel mills. Oil wells. Factories. Tooling for said factories. All capital intensive. Instead today's big investments are things like-driving up property prices, or leveraged company buyouts. Things where capital is "competing" for an otherwise zero-sum flow of cash.

All this I bring back to my own personal financial investing. Zero-sum competitions are boring and often leave the competitors poorer for their efforts. As such I want to find in my own local country chances to invest my time and money into value creation. In our case that means building a video game (my profession), and building a mid-scale solar power-plant (50KW).

Cheers for the exhaustive reply, there are definitely some points I was missing.

Perhaps for people in the know, this is obvious - but the term "yearly" or "year-over-year" would have been very handy if included in your original comment.

Central Banks have created a debt bubble by lowering the interest rate. Banks create cheap loans with the debt created from central banks. Credit expands. My personal opinion is that is that the debt cannot be payed back. Also there is lots and lots of debt in derivatives.

I think that the debt is deflationary in the sense that companies use the loans to automate. Prices are also kept low by globalization. Prizes of local produced services are increasing. I am trying to say that the wage inflation part of central bank policy is not happening on goods due to automation and globalization.

Does Corporate Debt, or Corporate Debt per GDP actually matters?

There are many companies that are Cash Rich and holding Debt, for example Apple has $100B debt but $200B cash. And due to the way US Tax Multinational companies, most of them have Oversea Cash and they are holding Debt in US borrowing against those cash.

And hence the Risk of those Debt, If they are Cash Rich, then it really isn't much of a problem. Or Earning Per Debt Ratio, if they are any higher than previous era.

Both are far more important than say Interest Rate of Total Debt. A Normal person have $1B Debt might have been shocking, I doubt Bill Gate holding a one billion debt would cause much of a problem.

I dont have any data or answer on hand, so I dont know if those debt are really a problem for now.

I worry a lot more about China's Corporate Debt than US's debt.

I don’t quite understand how one writes an article like this without putting the amount of debt into context, where is the critical thinking here? The S&P 500 market cap is like $25t, $10t in debt doesn’t sound crazy

I'm not clear on how market cap relates to the amount of debt in the way you're phrasing it.

The dollar amount of bonds + interest that corporations have to pay back doesn't change day to day like market cap does. The S&P500 fell 33% between Sept - Dec 2008. That didn't change the amount of debt corporations had to pay back. Unless they received a bailout, all that changed was that they could now borrow at near-zero rates.

My point is that if you buy something (a company in this case), financing ~29% of the purchase price with debt ($10t/($10t+$25t)) does not feel super levered.

You point is valid as well, and the useful context (again not provided by the article) would be metrics like debt/EBITDA or fixed charge coverage ratios

ehhhhh tangentially related

the credit markets are much larger than the equities markets, but corporate credit is a decent comparison in size since we are removing government debt from the equation

I think your observation paints an even rosier picture than you intended though, many of the corporate debt issuers do not publicly trade their shares

Anything that happens happens. Anything that in happening, causes itself to happen again, happens again.

Systemic (read business cycle provoking) risk takes this form, by definition. That's what's systemic about it.

Interest rates are low. Credit is cheap. Junk bonds are junk because more junk bonds will default. When will they default? Do defaults pile up during a credit "crunch?" Will a pile up of defaults trigger a credit crunch?

Does the thing that happens cause itself to happen again?

Share buybacks financed by debt doesn't sound like a great way to create sustainable growth

Share buybacks and dividends are about returning money to the shareholders.

That's literally what companies are for. Getting a return is the main reason people invest in the first place.

(Yes, some people start companies to change the world. But let's be honest here.)

Sustainable growth is eg when those shareholders re-invest the returns somewhere in the economy. Capital returns themselves are not growth, obviously.

Using debt to finance capital returns to equity holders is just a change in capital structure: from equity to debt. See https://en.wikipedia.org/wiki/Capital_structure about details.

https://en.wikipedia.org/wiki/Modigliani%E2%80%93Miller_theo... suggests that the exact details of a company's capital structure depends on 'taxes, bankruptcy costs, agency costs, and asymmetric information' and other market inefficiencies. Basically it's just about some technical trade-offs, no moralizing necessary.

(If you want to moralize, complain that interest on debt is tax deductible, but return on equity ain't.)

The point wasn't to moralise or to ponder about the purpose of companies. Nothing wrong with returning money to shareholders.

However doing it with debt, rather than with profits, sounds like financial engineering taking advantage of tax breaks and unnaturally low interest rates (a gift from central banks to those with investments and access to low rates) - with potentially poor outcomes to many participants in the economy later on, especially when the ratio of debt to profit gets out of whack and there are tremors in the global economy.

What happens when the economy tanks, and many of these loans go sour? Over leveraged companies go under, jobs are lost, domino effect on the real economy. If a company takes on debt it should be used for investing in real growth (and future profits), not for financial engineering to prop up the share price with low interest (for now) borrowed money. The only thing that kind of behaviour leads to is a debt-fuelled bubble.

If everyone is being completely honest then using debt to return money to the shareholders is fine. It is equivalent to using profits to buy back shares and borrowing to finance new investment.

The issue is more likely to be that if the company is misjudging how much debt is wise or what the return is likely to be, the people who are responsible for picking up on that (shareholders, senior management) are probably selling their stake in the company.

Eg, if I owned a company like WeWork I have incentive to make the company borrow large amounts of money, use that money to create artificial demand for shares, then sell my shares. Effectively a wealth transfer from lender -> me and an obligation transfer for the remaining shareholders to pay back the initial lender. That way I benefit even if the company makes no actual money and has massive debts. That sort of bad faith can't be proven until there are major scandals though; if people are operating in good faith and the lender is canny it is fine.

there is a vast difference between using profits to buy back shares and using debt to buy back shares

With interest rates so low you might as well use debt. With high corporate tax rates, repatriating cash is expensive. Might as well use cheap debt while you can

>there is a vast difference between using profits to buy back shares and using debt to buy back shares

There is zero difference. It's all money in a pool of corporate capital that is either growing (or shrinking some if you're paying interest).

If you can do borrow money at negative rates and buy back shares, why wouldn't you?

I am not quite sure what you mean by debt-fueled bubble?

Your perception might be coloured by the miscategorization of the time before the Great Recession as a bubble. It wasn't. (See eg Kevin Erdmann's detective work on this at https://economicsdetective.com/2019/03/re-thinking-the-so-ca... )

Btw, loans going sour is a problem for the creditor, but ain't a problem for the economy, as long as total nominal spending is kept stable. See eg https://www.cato.org/cato-journal/springsummer-2019/financia...

In any case, I'm glad that my central bank doesn't mess with interest rates. So no funny business going on around 0% interest. See https://www.mas.gov.sg/monetary-policy/Singapores-Monetary-P...

>unnaturally low interest rates (a gift from central banks to those with investments and access to low rates)

Can you explain what an "unnaturally low" interest rate is?

The Fed sets the overnight rate at which banks lend reserves to each other. While it is a benchmark for many other interest rates, anyone, anywhere can lend and/or borrow at any rate of their choosing. If rates are unnaturally low, why aren't people charging more? Why are they leaving money on the table?

Side note: it's a funny thing to me, that the vast majority of American citizens are net debtors, yet we complain about low rates and inflation. Most people don't understand what's good for them.

Sure, interest rates set by most major central banks have been at historical lows, between 0% and 2% for the last 10 years, since the last crisis. And it doesn’t look like it’s possible to raise them much in the next few years - the economy has become accustomed to low rates and can’t take a rate hike. Nor will it be possible to lower them much (since they already close to zero) in case there is another downturn and the central banks need to stimulate. I don’t think we have ever seen such a long period of low rates before, so this is relatively uncharted waters.

Inflation of consumer goods, which central banks have a mandate to track, is still relatively low, mostly thanks to low oil prices. But if you look at the prices of financial assets, you’ll see a lot of “inflation” hiding there thanks to money printing and low rates of the past 10 years.

Actually, real interest rates on eg American government bonds haven't been that low by 20th century standards. We saw much more negative real interest rates before. Especially after taxes.


Nominal interest rates however are very low, because nominal GDP growth is low.

The Fed also controls treasury yields via quantitative easing.

Debt can be paid off at any time. Dividends are paid out on a specific day.

Since rates are so low, taking debt is a lower risk

Orchastrated by Wall Street and championed by Uncle Sam. Again. It seems as if the USA no longer has a traditional economy, but instead its depth and breadth has been an tool in the WS financial instruments toolbox.

Federal debt is 20T, so what? At least corporations can be held responsible in court. When the federal government defaults on its debt (yes, that's a "when" not an "if") it's going to take a whole army to make it pay.

Governments can just print some more money to pay their debts. There are significant downsides to doing that (massive inflation, high interest rates..) but ultimately it is an option, and that gives lenders a level of security that businesses can't offer.

Also, you don't need an army to make a government pay. You just need to threaten to stop lending in the future. Then the government will pay, because the alternative is to stop spending on things the people want like military, police and services, and then they vote you out of power (or start a revolution and kill you).

It's an option that only works if there are buyers for that debt. That isn't always going to be the case. For instance, all new debt issued by Italy has been scooped up by ECB for years... The US is still a much more credible sovereign but that's just for now.

And no, governments don't always pay, they happily and often default - just remember Greece of recent years. And there is a word for stopping to pay for things the people want: austerity. Haven't heard of that happening around the world recently, I presume? The US economy is still the strongest in the world, but the debt crisis will get it too, no doubt.

And there is a word for stopping to pay for things the people want: austerity. Haven't heard of that happening around the world recently, I presume?

Plenty of governments claimed they were implementing austerity while their level of borrowing has still been going up a lot.


I don't want to be a reductionist, but it seems like a lot of this comes down to policy makers (and really, just people in general) not having the courage or integrity to follow through on their beliefs. Keynsians say, "we need austerity, but TODAY is not the time for it" and then when the future arrives, don't have the courage to follow through on curtailing spending. Non-Keynsians say, "we need austerity NOW" and then lack the courage to effectuate real austerity (instead choosing milquetoast measures like taxcuts combined with trivial reductions in spending).

There seems to be this notion that society just doesn't have to pay-up now. Rather, we only pay-up at some point in the future (a point in the future that we define). That may be, but there has to be a trade-off, right? It seems weird to think that reality doesn't force a trade-off on us. It probably does, and it might come in the form of added complexity which reduces our ability to successfully engineer our way to a controlled exit of our collective responsibilites.

It is desired by some that we don't get ourselves out of debt. Debt means credit somewhere.

Most people suffer the repayment of interests to those who mended. Those who lender are fine with the situation. Repayment of capital, or a brutal wipe of the debt would mean no interest gain, or worse, nothing at all, ground zero for the lender.

I think people's response to climate change shows that on average people would rather pass problems down to their children's generation than incur a mild inconvenience. It makes perfect sense if you assume people are self-interested.

Er, citation needed on the Italian bond thing? The open market seems to be awarding them falling interest rates: https://www.ft.com/content/2fe7acb2-e4ff-11e9-9743-db5a37048...

Greece did not actually default apart from a 20-day delay on a payment to the IMF. No government will "happily" or "often" default; the closest to that is Argentina, which is mired in lawsuits as a result.

The people that got actually lose-your-money defaulted on in the 2008 crisis were (a) a lot of equity bank investors (shareholders) and (b) Cypriot depositors with over €100k.

Governments can't just print money (at least not those with central bank independence, like the EU, US, etc.). However they can raise taxes. Central banks can print money but their mandate is to use their tools for the benefit of the whole economy and not just the government. If the US government took over the Fed (to make an example) that would harm investor confidence in Treasuries and cause them to pay much higher interest rates on newly issued debt.

Agreed with you, but also worth noting the US gov would likely take over the fed in a time of crisis. If interest rates hit 10%, the fed was refusing to buy bonds because of inflation risk, and the US gov's choices were between 'default on debts' and 'take over the fed and make them do it' there would be some emergency clause pulled out by whitehouse lawyers and they would do it. My evidence for this is the extreme measures other governments have done in the past when faced with debt crises; they do print more, they seize private assets, the run price controls, etc. They'll do anything to survive and taking over a private monopoly over money printing (even if that loses the trust of the bond market and greatly reduces their ability to issue debt in the future) is well within things the US government seems willing to do.

If you look at the history the preferred way for the US government (and others) to raise lots of money in times of crisis was through "war bonds" (named "Liberty Bonds" in the US during WWI). Back then the government financed itself by encouraging people to safe more and invest that money into such bonds. Your scenario has definitely played out in other countries - for example by forcing banks to invest the money in saving accounts into government bonds.

Printing money only works if the debt is denominated in the printed currency. That is why there are plenty of government defaults.

Reserve currencies are in a somewhat better position to monetise their debt without defaulting. I think this is what will happen with USD over time.

I think this is also why many governments have been on a gold buying spree for the last couple of years, and are desperately looking into alternatives to USD as a global reserve currency.

In the short term USD is still seen as a safe haven, but long term I don't think there is any other way to get rid of the $22 trillion+ debt mountain than to slowly debase the currency

The trend is known as de-dollarization. The US has been able to go into massive debt because of the reserve currency status. As we have been losing that and will continue to lose it, our standard of living will continue to drop like a rock. https://www.investopedia.com/terms/d/dollarization.asp

Governments can also be held liable in court (see current lawsuits against Argentina for exactly this) and there is no evidence that a default is on the horizon for any reason other than a "voluntary" one imposed by a failure to raise the debt ceiling by legislation. Low interest rates are fairly convincing evidence that the market doesn't think a default is likely.

This kind of personal moral or accounting perspective to loan bubbles is not helpful. Whataboutism in general is disgusting way to argue.

When there is massive bubble that poses systemic risks, it can't be solved by just keeping people accountable because it's systemic. Those who did not take unnecessary loans or had no loans at all can lose big.

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